TALES OF THE TAPE: SBUX, MCD, TAST, BWLD, RUTH

Notable news items and price action from the restaurant space as well as our fundamental view on select names.

MACRO

Today the National Federation of Independent Business index fell from 90.9 to 90.8 for June (the fourth consecutive month of declines. June’s decline brings the cumulative drop since March to 4 points. The details were mixed-to-poor as hiring plans rose but small-businesses turned more pessimistic on the economy’s prospects. Expectations for the economy to improve over the next six months rose fell sharply in June, declining from -5% to -11% and its worst showing since July 2010.

Also today, the ICSC chain store sales index continued to show strengthening consumer spending in early July. The ICSC chain store sales index has grown strongly in the last three weeks, with a 0.4% gain in the latest week coming on the heels of gains of 1.5% and 2.9%. Hot weather reportedly stimulated sales of seasonal merchandise, outweighing the drag from higher gasoline prices.

The inflation rate in France unexpectedly climbed to the highest in more than 2.5 years, +2.3% y/y, in June as costs for food, energy and services rose. Crude oil prices have jumped 26% over the past year, forcing French motorists to pay more for gasoline and sapping households’ disposable income.

Gasoline prices remain a significant constraint on consumer spending, and are moving in the wrong directions again. Prices were up $0.06 last week, taking the average price of unleaded gasoline to $3.70 per gallon.

QUICK SERVICE

SBUX is rolling out Bistro Boxes today: small meals under 500 calories, such as Chipotle Chicken Wraps and Sesame Noodles, that cost less than $6.

MCD has introduced a new entrecote premium burger in Israel that is branded as the “Big America Series” which includes the Big New York and Big Texas hamburgers. Both will be sold for about $9.20 or $14.50 with fries and a beverage. This is a low price-point in Israel versus boutique chains, according to Ynet News.

TAST was cut to “Outperform” at Raymond James.

CASUAL DINING

BWLD was cut to “Market Perform” from “Outperform” at Raymond James.

RUTH was cut to “Market Perform” at Raymond James.

Howard Penney

Managing Director

Rory Green

Analyst

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07/12/11 08:03 AM EDT

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - July 12, 2011

If there's going to be a capitulation day this week, this should be it. Alternatively, if Global Equity markets and European CDS don't arrest these abrupt moves soon, world markets are going to have a big problem. As we look at today’s set up for the S&P 500, the range is 39 points or -1.70% downside to 1297 and 0.64% upside to 1328.

SECTOR AND GLOBAL PERFORMANCE

EQUITY SENTIMENT:

ADVANCE/DECLINE LINE: -2168 (-996)

VOLUME: NYSE 829.43 (+7.56%)

VIX: 18.39 +15.30 YTD PERFORMANCE: +3.61%

SPX PUT/CALL RATIO: 2.88 from 1.65 (+74.71%)

CREDIT/ECONOMIC MARKET LOOK:

TED SPREAD: 22.57

3-MONTH T-BILL YIELD: 0.03%

10-Year: 2.94 from 3.03

YIELD CURVE: 2.57 from 2.63

MACRO DATA POINTS:

7:30 a.m.: NFIB Small Business Optimism, est. 91.2, prior 90.9

8:30 a.m.: Trade balance, est. (-$44.1b)

8:30 a.m.: USDA WASDE report

10 a.m.: IBD/TIPP economic optimism, est. 43.9, prior 44.6

10 a.m.: JOLTs job openings

11:30 a.m.: U.S. to sell $28b in 4-wk bills

12 p.m.: EIA short-term energy outlook

1 p.m.: U.S. to sell $32b in 3-yr notes

2 p.m.: Fed releases minutes from June 21-22 FOMC meeting

4:30 p.m.: API weekly inventories

WHAT TO WATCH:

The Fed is scheduled to release minutes from the June 21-22 FOMC meeting at 2 p.m.

European finance ministers meet again today with plans to respond to release of bank stress tests later this week

SPR-ing the Consumer

This note was originally published
at 8am on July 07, 2011.
INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK
(published by 8am every trading day)
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“Yet for all its conflict and complexity, there has often been a “oneness” to the story of oil, a contemporary feel even to events that happened long ago and, simultaneously, profound echoes of the past in current and recent events.”

- Daniel Yergin, The Prize

Post World War II, global production of oil surged from 9 million barrels per day in 1945 to 40 million barrels per day in 1970. Saudi Arabia and Iran were eager to monetize their vast resource potential – “Nobody could have lifted enough crude to satisfy all the governments in the Persian Gulf during this period,” said George Parkhurst of Standard Oil of California. A wave of Soviet Union exports flooded the market; US Senator Kenneth Keating remarked, “It is now becoming increasingly evident that [Khrushchev] would also like to drown us in a sea of oil if we let him get away with it.” In 1956, major oil companies struck oil in Algeria and Nigeria. And in 1959 Standard Oil of New Jersey “hit the jack-pot” at the Zelten field in Libya.

Consequently, the real price of oil sank 40 percent between 1960 and 1969. Howard Page, Middle East Coordinator for Standard New Jersey said of the glut, “Oil was available for anybody, anytime, any place and always at a price as low as you were charging for it.”

In the late 1950s, President Eisenhower found himself in a precarious position. Though the US was still the world’s largest oil producer, the plethora of cheap, foreign barrels encroached on the competitiveness of domestic, independent producers. Oil imports rose from 15 percent of the domestic production equivalent to 19 percent between 1954 and 1957 alone.

Congress urged Eisenhower, who morally opposed protectionism, to curb imports. One geologist wrote to then-Senator Lyndon Johnson, “no sense in bankrupting every independent oil man in Texas for a few Arabian princes.” Eisenhower resisted and criticized the “tendencies of special interests in the United States” that were “in conflict with the basic requirement on the United States to promote increased trade around the world.” Begrudgingly, however, Ike caved, and on March 10, 1959 he signed into law a mandatory quota on imported oil equal to 9 percent of domestic consumption.

Eighteen months later, representatives from Saudi Arabia, Venezuela, Kuwait, Iraq, and Iran gathered in Baghdad. The Organization of Petroleum Exporting Countries – OPEC – was established. Market intervention certainly has its unintended consequences. While I don’t assert that Eisenhower’s import quota was the sole motivating factor for OPEC’s birth or that OPEC would not exist absent the policy, it was of considerable influence. In fact, Daniel Yergin, Pulitzer Prize winning author of The Prize: the Epic Quest for Oil, Money, and Power, called Eisenhower’s import controls “the single most important and influential American energy policy in the postwar years.”

“Profound echoes of the past” resonate in President Obama’s June 23rd decision to release 30 million barrels from the US’s Strategic Petroleum Reserve (SPR). The attempted market intervention was (allegedly) prompted by the loss of Libyan supply and OPEC’s failure to officially raise production quotas in its most recent meeting. Even though the contentious OPEC meeting failed to quell the IEA’s supply concerns, the Saudis were explicit in their intention to raise production by 1.5 million barrels per day regardless of the Iranian-lead OPEC decision – more than enough to replace the lost Libyan output.

Market participants quickly called out the IEA action for what it was: a haphazard attempt at price manipulation as global growth slows; after all, the agency’s press release stated: “Greater tightness in the oil market threatens to undermine the fragile global economic recovery.” Thus, while Eisenhower sought higher oil prices to protect US producers from the actions of oil exporters, Obama seeks lower oil prices to shield US consumers from the same foes.

Geopolitical tensions in the Middle East have, of course, put a premium on crude oil; Brent – the world’s light, sweet benchmark grade – rallied from $102 per barrel to $114 per barrel in February alone. But mention of US monetary policy is warranted in the oil price discussion. After the Fed announced QE2 in late August 2010, oil prices moved 20% higher before you ever “Googled” a map of Tunisia. The excessive liquidity injected into financial markets via the Fed’s bond-buying programs spurred investment into real assets, particularly across the commodity complex.

And while Fed Chairman Ben Bernanke often cites stock market appreciation as evidence of QE’s success, he attributes commodity price inflation merely to “transitory” supply and demand fundamentals. It would take a previously unforeseen level of accountability for Bernanke to admit that his policies are in part responsible for higher food and energy costs, while wages and employment are “frustratingly” stagnant.

In his semiannual report to Congress on monetary policy earlier this year, Bernanke commented on rising oil prices: “We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability." The traditional tools of monetary policy are interest rates, the monetary base, and reserve requirements; but does the Fed now sell oil too? While Bernanke was likely consulted, no, he didn’t make that call. Still, the Fed’s bond-buying program ended on June 30th and the US Department of Energy (DOE) was auctioning off emergency crude reserves the very next day. Next up: the USDA will be planting corn in our national parks…

But what has been the impact of the SPR release thus far? Well, Brent plummeted from $114 to $105 within two days of the announcement, though quickly recovered all of that loss. The Brent futures curve went into contango for the blink of an eye before returning to backwardation. The RBOB gasoline futures curve never budged and the front-month contract is now trading above its pre-SPR release price. In the immediate-term, the oil market intervention did very little; on a longer duration, the IEA may have sparked the next leg up in the commodity.

Most notably, the IEA’s decision to release reserves after the Saudis announced their intention to fill the Libyan supply shortfall calls into serious question Saudi Arabia’s spare capacity and oil quality. Not only that, but eventually the IEA will have to enter the market as a buyer to refill the reserves; oil is not as easily produced as fiat currencies. And the fact that the SPR auction was “substantially oversubscribed,” according to the DOE, does not suggest that the world’s largest energy companies believe oil prices are heading lower.

Government intervention in free markets often has unintended consequences, and, as a result, in the long-run consumers will realize an undesired outcome: higher oil prices. For the only lasting impact that the IEA’s reserve release will have is that the agency’s greatest worry – inadequate supply – is more of a reality than the market previously thought.

The chart below outlines our TRADE (3 weeks or less), TREND (3 months or more), and TAIL (3 years or less) quantitative setup for WTI crude oil. We will manage risk around these levels as government intervention inspires increased price volatility. We are currently short oil in our Virtual Portfolio as it is immediate-term TRADE overbought.

Our immediate-term support and resistance levels for oil, gold, and the SP500 are now $90.51-98.11, $1506-1532, and 1315-1360, respectively.

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THE M3: MSC; CHINA JUNE LOANS; GSS

The Macau Metro Monitor, July 12, 2011

NEVER SAY NEVER Inside Asian Gaming

According to a IAG source, gazetting is not the only way to getting a casino. "Land can be used for gaming if a letter of authorization to that effect is obtained from the DICJ (Macau's gaming regulator). My understanding is such a letter of authorization from the DICJ has been granted to the Macao Studio City (MSC) project some time ago," said the source. The source cites Galaxy Starworld as a precedent of a gaming property sitting on non-gaming gazetted land.

IAG sources also say for gaming to be official (and a re-gazetting of MSC), MPEL needs to pay an additional land premium. But don't expect any announcement from MPEL on the land use issue until they have gotten the necessary assurance from Macau's CEO Chui Sai On.

CHINA H1 NEW LOANS FALL TO 4.17 TRILLION YUAN AFP

In June, 633.9 BN yuan in new loans were issued, 3.4% higher YoY and +14.9% MoM. This is significantly higher than a preliminary estimate of 500 BN for June by an unnamed source. For 1H 2011, Chinese loans dropped 10% YoY to 4.17 TN yuan.

CHART OF THE DAY: Fiat Fools

Fiat Fools

“Any fool can know. The point is to understand.”

-Albert Einstein

To truly embrace the analytical incompetence of central planners tasked with managing globally interconnected risk, one has to accept that these people are Fiat Fools. Sure, any one of them can know what happened yesterday. But can they proactively predict risk?

We introduced the term Fiat Fool during the initial stage of the European Sovereign Debt crisis (2010). To understand what the Fiat Fools are doing to economies and markets alike, all you have to do is pay attention.

Fiat Fools fundamentally believe that they can smooth economic cycles and tone down market volatility. I guess that’s what the IMF’s latest dudette in Chief, Christine Lagarde, was trying to do this morning when she proclaimed her mystery of faith that “some of the Italian numbers are excellent.”

Hedgeye’s long-term conclusion has been that the Fiat Fools do two things:

They shorten economic cycles

They amplify market volatility

That’s it. There is no smoothing and toning. There is no “price stability.” And there most certainly is no “full employment.” So, it’s time for La Bernank to unite with his Keynesian storytellers in Europe and admit who they are, and what they do. Greenspan did.

Not that the Obama Administration wants to be held accountable for perpetuating Keynesian Economic Ideologies, but none of these political people who support Bernanke and Trichet should forget what their idol himself admitted to Henry Waxman (under oath) during the thralls of 2008.

HENRY WAXMAN: “Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

ALAN GREENSPAN: “Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to -- to exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is, yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact.”

No. I don’t think reminding professional politicians of context and causality is going to change them this morning. Sadly, these people are more concerned with their own career risk management than that of your markets and economy. So onto the next.

Back to the Global Macro Grind…

Here’s our real-time risk management look at Global Equities:

China was down -1.7% overnight to 2754, barely holding onto our immediate-term TRADE line of support = 2730

All the while, this morning’s high-frequency economic data was what I consider fine. Chinese Money Supply Growth (M2) came in at 15.9% (it’s been proactively cut in HALF by the Chinese since we got bearish on China at the end of 2009). Meanwhile German, French, and British Consumer Price Inflation (CPI) readings for June were benign enough to provoke Europe’s Fiat Fool in Chief to stop raising rates.

As for the Fiat Fools having anything in the area code of a modern day real-time risk management process, you can bet your Madoff that they don’t have one. Nor do they have any experience managing any of the aforementioned globally interconnected risk where it matters – on the tape.

My immediate-term support and resistance ranged for Gold, Oil, and the SP500 are now $1, $92.96-96.74, and 1, respectively.

Best of luck out there today,

KM

Keith R. McCullough Chief Executive Officer

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